For every action there is an equal and opposite reaction. And the real estate market is no exception.

One of the basic unwritten tenets of business compels every break-neck-paced boom to crash sooner or later. This could be the case once again with the UAE’s property market five years on from the messy downturn of 2008-09. It seems as though the embers from the last real estate slump are only just becoming a vague memory — fizzling out on a distant horizon — of a time when the market was irrational and immature to a  point of recklessness.

And while talk of a widespread recovery has been on the lips of every stakeholder, the reality is that we are faced with another boom in the market. In Dubai in particular.

At the peak of the downturn in 2008-09, real estate prices plummeted by up to 65 per cent in some areas across the UAE, at a time when the industry comprised more than 30 per cent of Dubai’s economy.

A healthy economy

But lest we get carried away on a tide of mass panic, that the unwelcome sight of idle cranes flitting their days away unattended where a productive construction site manned by a myriad labourers in constant motion should be, there is slender reason to believe that the same dreary scene won’t be a sight visible in an emirate near you any time soon.

A healthy economy supported by the flourishing Dubai International Financial Centre — the GDP increased by 4.4 per cent last year, according to Dubai Statistics Centre data — and a raft of preventative legal mechanisms set to be implemented as real estate law alone are two important factors safeguarding the marketplace this time around, says Helen Tatham, Director of Residential at Knight Frank.

“Although the downturn  was an awful event, a lot of lessons were learnt between 2009 and 2011. Having witnessed Dubai’s real estate growth over the last ten years, the feeling of the city is very different now. The mentality is very different.

“Back then, for speculators and opportunists, Dubai was a dream. But there are more measures in place this time. There are new investor protection laws, which weren’t in place last time,” she says.

Legislative protection

A British expatriate stung by an investment in off-plan property in Dubai before the downturn, speaking to Property Weekly on condition of anonymity, said he is fighting an ongoing legal battle to reclaim “millions of dirhams” from a stalled project in Dubai. To date, the high-end project has not been officially cancelled.

The Real Estate Regulatory Agency (Rera), the arm of the Dubai Land Department (DLD) responsible for overseeing and regulating the legal framework of the emirate’s real estate industry, reacted to the plight of thousands of burnt investors in 2008-09 by saying it would up the legislative ante to protect future investors from developers playing fast-and-loose with financial loopholes in the law.

In July, the WAM news agency reported that His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, issued Decree No 21 of 2013 to instate a special legal committee tasked with liquidating cancelled real estate projects in Dubai.

The committee is endowed with the power to settle disputes between investors and developers over lost capital in projects stalled or halted during the property downturn, which have since been cancelled by Rera, and repaying investors where appropriate, as per Law No 13 of 2008.

Proper implementation

But Matthew Green, Head of Research at CBRE, says talking is fine but actions need to match the intent, and quickly. “Government intervention is already apparent with a new committee established to hear cases on long-awaited regulations, such as the investor protection law.

“However, these regulations need to be implemented and then properly enforced to ensure that the rights of investors are properly protected and to ensure that lessons are learnt,” he says.

Jerry Parks, Partner at Taylor-Wessing, a leading international law firm with offices in Europe, the Middle East and Asia, while making it clear that he doesn’t think the UAE will suffer another bankrupting property bubble, says that though some good work has been done to temper underhand financial schemes deployed by some developers, he’s not convinced much has actually improved by way of legal protection for investors.

“A lot of people talk of the Investor Protector Law (IPL) as being a big development. In my view, that hasn’t been backed up. It’s very well saying ‘if a project is cancelled the investors should get their money back’, but that’s not a mile away from where we
are now.

“If a project is cancelled, the current legislation says the investor should get their money back. But fundamentally, projects are cancelled because the developer has no money left. So where’s the money going to come from to pay the investor?

“So, I’m not sure that the IPL in itself is going to provide us with any answers to the problems. I’m more concerned with laws that stop developers from using investors’ funds to fund projects,” he adds.

At the time of going to press, the IPL or Tanweer Law, as it has been labelled, had not yet been ratified. It is still unknown when the law will come into effect, despite the industry waiting for more than 18 months for it.

Another measure that should stop developers from using investors’ funds to build projects is Dubai Law No 8 of 2007 on the matter of escrow accounts for real estate development, otherwise known as the Escrow Law.

Despite protecting property investors in Europe, the US and Canada for years, the similar escrow law passed in the UAE in 2007 does not uphold the same guarantees it has done elsewhere, Parks says. “There are a lot of problems with the escrow account. Firstly, it wasn’t there throughout a huge period of wild speculation, when it was most needed. It was a reaction to the problem, which therefore was not a solution to a problem.

“And, more importantly, the escrow law here is not a true escrow scenario as you would understand it if you’ve done real estate business in Europe, the US or Canada,” he says.

In other jurisdictions, the money paid into an escrow account is held by an independent legal firm. It is only if the developer delivers a project on time that all the money in the escrow account is then handed over to the developer. Up until that time the investors’ money is safeguarded by the law firm. Parks says: “Here, however, there are a number of differences. The developer can use the money to pay for the land, marketing and construction costs. So, at any given time, there’s probably no money in the escrow account. Because it’s always being used for something — land, agents, marketing, construction, etc.”

All of which means that if a project fails at 60 per cent completion, investors can’t simply go to the bank,  which hold the escrow accounts in the UAE, and ask for their money back. This happens for two reasons, Parks says.

“First, if the project isn’t officially cancelled, the Escrow Law doesn’t come into effect. And second, if the funds deposited into the escrow account have been used by the developer to fund the project, there’s no money in the account anyway.”

Speculators and flipping will always exist as long as a market permits them to get a foothold. And the distressing consequences of inadequate legislation can be a nightmare for investors.

Inadequate legislation

Marcus Arthur tells Property Weekly of his ongoing battle to reclaim the money he put into an off-plan property in Ajman (where Decree 21 doesn’t apply) promoted by developer Al Andaleeb in 2009, and said it was proving to be “dumbfounding”.

Arthur has more than Dh300,000 tied up in Al Andaleeb’s bank account with no sign of the property even close to construction. In 2010, Arra, the Ajman property regulator, confirmed the developer didn’t even have a licence to build.

“I’ve paid more than 60 per cent of the payment. But they have completely disappeared off the radar. They have no response to give. I am with a lawyer right now trying to get my money back,” he says.

Arthur was attracted by an offer by Al Andaleeb for an 800-square-feet one-bedroom apartment in Chocolate Tower, marketed as one of three high-rise residential buildings in the planned Ajman community Emirates City.

“The offer they had seemed very lucrative. I only had to commit for the year that it was being built. I got a contract with them that said they would buy it back from me with a 50-per-cent mark up, so that was the only thing that drove me. I wanted to invest and flip within a year and a half,” he says.

Four years later, Arthur has had no contact from Al Andaleeb, and his money is out of reach.

“The funds were going straight to the developer because there was no escrow law at that time. Half way through the [monthly] payments, they decided they had to have an escrow account, just before everything came crumbling down.

“The developer had some issues in presenting the right paper work, so what I understand is that [the authorities] froze the bank account just before everything crumbled,” says Arthur.

“When we ask today what happened to the developer, we’re told that his money is blocked, that there is Dh25 million in the account, which is not an escrow account, and that it’s blocked. There’s no way to access it.”

Sadly, this is a reality that could repeat itself if consistent regulation isn’t implemented UAE-wide.

Craig Plumb, Head of Research — Mena at Jones Lang LaSalle, says there is more that can be done. “The thing being talked about is limiting the amount of finance available for real estate. The central bank of the UAE has talked about restricting the availability of mortgage finance and limiting the amount the banks are able to lend the development industry,” he says.

But there’s a caveat. The crux of the problem for the UAE’s real estate industry is cash, literally. “About 80 per cent of all the purchases last year didn’t use a mortgage, they were cash buyers. And how can you regulate and stop that? It’s not easy.

“So one of the other suggestions, but this hasn’t been acted on yet, is that there needs to be more in the way of restrictions on, or some form of tax on capital gains from real estate,” Plumbs says.

As speculators once again eye Dubai’s property scene, if the market does get out of control, we could be faced with another imminent downturn if the legal framework isn’t altered sooner rather than later.

The prevailing sentiment suggests that stakeholders in the UAE’s spectacularly up-and-down property market should err on the side of caution before jumping into it head-first.